The former vice-president of exploration at Bre-X Minerals, John Felderhof, has been acquitted of four charges of insider trading and four of misleading disclosure in connection with the 1997 Busang salting fraud in East Kalimantan, Indonesia.
The Ontario Securities Commission (OSC) had brought the charges against Felderhof, alleging that he made $84 million in sales of Bre-X stock while in possession of information about the fraudulent project not generally available to the market. The OSC also alleged that four news releases disclosing resource estimates were false and misleading and that Felderhof ought to have known they were false.
The trial, which started in the fall of 2000, was interrupted by the Commission's application to have Judge Hryn removed from the case. That application was denied and the trial resumed in 2005.
The four insider trading counts hinged on Felderhof's failure to disclose potential legal hazards to Bre-X's ownership of the Busang property. In his decision, Judge Hryn said the OSC had not proved that the facts in question were material to the public.
One of the particulars of the charges the OSC regarded as a material fact - that Bre-X had not complied with contractual obligations to the Indonesian government and to shareholders of Westralian Atan Minerals, the company it was acquiring in order to hold the Busang property - was not proved in the case, Judge Hryn concluded. He said two other particulars - that Bre-X had misled the Indonesian government about its ownership of Westralian, and that other parties had been "unjustly excluded" from ownership - were not facts the Commission could prove Felderhof knew.
He concluded the two other particulars in the charges - the complaint made to the Indonesian government by businessman Jusuf Merukh that companies he controlled were entitled to an interest in the property, and the Indonesian government's cancellation of the preliminary survey permit on the Busang Southeast Zone property - were not material, even though Felderhof was aware of them. The Indonesian government's imposed property settlement - which gave Bre-X a 40% interest in the property - showed that the existing land tenure was not secure anyway.
The four counts of misleading disclosure all referred to published resource estimates, ranging from 514 million tonnes grading 2.4 grams gold per tonne to 889 million tonnes grading 2.5 grams, which were proved to be false by the Strathcona Mineral Services technical audit of the Busang exploration project in May 1997. The Commission alleged that Felderhof should have known that the estimates were false, while Felderhof's defence was that he had exercised reasonable care while supervising the exploration work.
Judge Hryn said that the disclosures were false and therefore a guilty act, but concluded based on defence testimony that Felderhof "took all reasonable care" to ensure the truth of the disclosures. Hryn relied heavily on evidence that other professionals involved in the project, including consultants and potential partner companies, had all failed to see evidence of a salting program at Busang, and that geologists from Strathcona, who exposed the fraud, had had the benefit of hindsight in recognizing the signs of fraud.
On that basis, he found that Felderhof had accepted the drill results from Busang in the same way as consultants, "analysts, suitors and others." He found that the indications of possible fraud at Busang - the "red flags" numbered in Strathcona's report on the fraud, and used heavily in the Commission's case against Felderhof - had not been noted by a large number of mining professionals and were therefore not something Felderhof could reasonably have been expected to pick up on, without some extrinsic reason to be looking for potential fraud.
The Securities Commission has 30 days to file a notice of appeal.
In an interview, Joseph Groia, who defended Felderhof, said "if there is one critical lesson to be learned from Bre-X. . . it's that in cases like this, there's a real need for hindsight not to creep into this assessment."
He said the case should remind investors that resource estimates are not certainties.
"There are always going to be situations where clever and dishonest people are able to fool honest people like John Felderhof and make them believe results that turn out, with the benefit of hindsight, not to be real."
Graham Farquharson of Strathcona Mineral Services, whose evidence Judge Hryn criticized in parts of the decision, said the indications of fraud at Busang should have been clear, but "the judge didn't buy those comments. . . It's his opinion in the end that counts."